What is Market Making?
Market making is an activity whereby a trader simultaneously provides liquidity to both buyers and sellers in a financial market. Liquidity is the degree to which an asset can be quickly bought or sold without notably affecting the stability of its price. Market makers “make a market” by quoting prices to both buy and sell an asset. In this way, the market maker (or liquidity provider) acts as both a buyer and seller of last resort where there would not naturally be another buyer or seller.
Liquidity Provider For Altcoins
Because crypto markets are in such an early stage, we’re seeing an influx of new cryptocurrency projects that want to bring their coin to market. When it comes to new altcoins, however, the initial shortage of buyers and sellers leads to insufficient liquidity.
The lowest point for a digital asset is when it is first issued and listed on an exchange. Not surprisingly, using market-making services during this time is crucial for the project behind the token. Trades in the brand new asset need encouragement so that early investors who are selling off have a market for the new token. Liquidity is necessary to get trade volumes up to be listed on more exchanges. Market makers fill this need by:
● Guiding the project’s token towards its own price discovery
● Stabilizing the price for future trading and growth
● Making sure there are plenty of orders on both sides of the order book
● Maintaining tight price spreads, which allows investors to know there’s a healthy order book for that asset
● Helping to create a market for that token